The cost of a lease is typically recorded as which two types of accounts on inception?

• A. Assets and revenues
• B. Liabilities and expenses
• C. Assets and liabilities
• D. Revenues and equity

Answer: (C)

At the moment a lease is signed, the lessee records a right-of-use asset and a lease liability. The asset reflects the right to use the leased asset, while the liability reflects the obligation to make future lease payments. The two figures balance because the value of the asset is tied to the present value of the future payments. This initial recognition is why assets and liabilities are the correct pairing. Revenues and equity don’t arise from the inception of a lease in this way, and expenses aren’t recognized upfront (except for any specific costs like initial direct costs or prepayments that adjust the two balances). Over time, the asset is depreciated (or amortized) and the liability accrues interest while payments reduce the liability.